BSE Sensex snaps two-day gains; RBI dampens mood

MUMBAI (Reuters) - The BSE Sensex fell on Wednesday snapping two days of gains, led by declines in rate-sensitive stocks, such as ICICI Bank, following media reports that the Reserve Bank of India (RBI) chief raised concerns about the high inflation, denting hopes of a 50 basis points rate cut this month.

RBI Governor Subbarao has once again rained on the parade on Indian stock markets with his remark that inflation is "still quite high" though off its peak, and there is "no room for stimulus" on both monetary and fiscal fronts, according to news agencies.

Traders said the central bank's policy review on January 29 would take precedence over earning season as the key driver for Indian shares, especially after the RBI dampened rate cut euphoria.

"RBI's direction on rates would be the key as it has been maintaining that inflation is the anchor point, so how can that change suddenly by putting growth in top priority," said Jagannadham Thunuguntla, Head of Research, SMC Investments and Advisors Ltd.

Expectations for a rate cut had gathered momentum this week after headline inflation slowed to its lowest level in three years.

The benchmark BSE Sensex fell 0.85 percent, or 169.19 points, to end at 19,817.63, marking its biggest single day fall since December 21, 2012

The broader Nifty fell 0.9 percent, or 54.75 points, to end at 6,001.85, closing marginally above the psychologically important 6,000 level.

Bajaj Auto Ltd (BAJA.NS) shares ended 1.8 percent lower after its prized profit margin slipped in the quarter to December, as rising costs and a fall in exports crimped earnings.

The company's margin, trumpeted as the best in the industry, fell to 20.1 percent from 21 percent in the same quarter a year ago, as lucrative export sales slipped 2 percent.

However, among stocks that gained, shares in Reliance Industries (RELI.NS) rose 1.7 percent after rival Essar Oil Ltd (ESRO.NS) said it swung to a net profit in the October-December quarter, with gross refining margins at a healthy $9.

Dealers said Essar results point to a potential improvement in refining margins, which would be reflected in Reliance's earnings on Friday.

RIL is expected to report its first increase in profit after four quarters of declining profits, according to consensus of analyst estimates, Thomson Reuters Starmine data showed.